The Tax Cuts and Jobs Act passed Congress last December and there is a lot of talk about how it will impact the tax situation for individuals. Few have considered the impact that the new law will have on divorce and child custody. (See  How Will the New Tax Law Affect Your Divorce? )

Much of the commentary centers around the elimination of the tax deduction for alimony payments. The new law eliminated the deduction for alimony payments from taxable income. Likewise, the recipient of the alimony no longer must claim the payments as income. This new law only applies to divorce finalized after 2018. For alimony orders predating the law, any modification of the alimony order requires a statement as to whether the new law applies for deductibility/income inclusion. While this sounds like a win for alimony recipients,  it actually demotivates a higher-earning spouse from agreeing to make alimony payments as part of a divorce settlement. Alimony payments were a useful tool in resolving divorces where one spouse was high wage earner and the other spouse was a lower wage earner. The paying spouse was motivated to receive the tax deduction where the receiving spouse would not be as heavily tax impacted. Additionally, the new law will effect premarital and postmarital agreements that predate the law because there is no consideration under the new law for agreements reached before the effective date of the law. The law applies based on the date of the divorce judgment.

Another issue arising from the new tax laws in the effect on valuation of a business interest in divorce. In many divorces, the business interest may be the main asset in the property division. However, the new law increase the cash flow of certain kinds of businesses due to lower C Corp tax rates (reduced from adjustable rates up to 35% to a flat rate of 21%).  If all else is equal, the effect of this should raise net after tax income for the difference in the taxes. The exact effect of this on corporate valuation won’t be known until a new business tax return is filed under the new law.

Additionally, for pass through entities, owners of the business may now deduct up to 20% of income defined as “qualified business income” without limit for taxpayers whose taxable income does not exceed $315,000 for married joint filers and phased out up to $415,000. If income is above that level, the deduction is limited to the greater of 50% of W2 wages or the sum of 25% of W2 wages plus 2.5% of the unadjusted basis of all qualified property. For valuation purposes, the TCJA has widened the differences in the tax rates for corporate entities versus pass-through income, which may require adjustments to some of the assumptions applied for valuation purposes.

The new law allows 529 plans to be used to pay for elementary or secondary private school tuition, not just college. There is no change in the tax benefits of a 529 plan, but for 2018, up to $10,000 per beneficiary may be distributed to pay for schooling.  This would raise an issue that needs to be addressed in the divorce settlement.

Personal exemptions have been suspended for tax years 2018 through 2025. During this 8-year period, divorcing parents cannot use personal exemptions for dependent children and do not need to negotiate over which parent gets to use the exemption. If the children are young enough, the exemption may return after the suspension period.

The TCJA significantly changed the child tax credit. It doubled the tax credit to $2,000 for each qualifying dependent child and make $1400 of the credit refundable. But, the credit phases out for married taxpayers earning more than $400,000. and, it expires in 2026. The phase-out threshold under the old law made the child tax credit irrelevant in many divorces, so increasing the phase-out threshold will make this a more significant issue.

The standard deduction has been doubled under the TCJA to $24,000 for married joint filers. The objective for this increase is to reduce taxes and simplify the filing process.Effectively this eliminated itemized deduction for most taxpayers. The limits on itemized deductions have been eliminated, which probably benefits higher wage earners. But the new law reduces the availability of the deduction for state and local taxes for individuals (but not businesses). So, for example, property taxes on a marital residence are deductible up to the cap of $10,000 for married joint filers, making much of property taxes on a high-value home not deductible. The new law limits the deductibility of mortgage interest for loans originated after 12/15/17. It also eliminates the deduction for interest on home equity loans. This provision is set to expire after 2025. This increases the cost of financing a home by limiting the tax benefits.

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Photo of Michelle O'Neil Michelle O'Neil

Michelle May O’Neil has 27 years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes…

Michelle May O’Neil has 27 years’ experience representing small business owners, professionals, and individuals in litigation related to family law matters such as divorce, child custody, and complex property division. Described by one lawyer as “a lethal combination of sweet-and-salty”, Ms. O’Neil exudes genuine compassion for her client’s difficulties, yet she can be relentless when in pursuit of a client’s goals. One judge said of Ms. O’Neil, “She cannot be out-gunned, out-briefed, or out-lawyered!”

Family Law Specialist

Ms. O’Neil became a board-certified family law specialist by the Texas Board of Legal Specialization in 1997 and has maintained her certification since that time. While representing clients in litigation before the trial court is an important part of her practice, Ms. O’Neil also handles appellate matters in the trial court, courts of appeals and Texas Supreme Court. Lawyers frequently consult with Ms. O’Neil on their litigation cases about specialized legal issues requiring particularized attention both at the trial court and appellate levels. This gives her a unique perspective and depth of perception that benefits both her litigation and appellate clients.

Top Lawyers in Texas and America

Ms. O’Neil has been named to the list of Texas SuperLawyers for many years, 2011-2018, a peer-voted honor given to only about 5% of the lawyers in the state of Texas. In 2014-2018, Ms. O’Neil received the special honor of being named by Texas SuperLawyers as one of the Top 50 Women Lawyers in Texas, Top 100 Lawyers in Texas, and Top 100 Lawyers in DFW. She was named one of the Best Lawyers in America for 2016 and received an “A-V” peer review rating by Martindale-Hubbell Legal Directories for the highest quality legal ability and ethical standards.

Author and Speaker

A noted author, Ms. O’Neil released her second book Basics of Texas Divorce Law in November 2010, with a second edition released in 2013, and a third edition expected in 2015.  Her first book, All About Texas Law and Kids, was published in September 2009 by Texas Lawyer Press. In 2012, Ms. O’Neil co-authored the booklets What You Need To Know About Common Law Marriage In Texas and Social Study Evaluations.  The State Bar of Texas and other providers of continuing education for attorneys frequently enlist Ms. O’Neil to provide instruction to attorneys on topics of her expertise in the family law arena.